EQUALISATION LEVY AND TDS

In the last ten years, electronic commerce (or e-commerce) in India has burgeoned exponentially. E-commerce has been broadly defined by the Organisation for Economic Co-operation and Development (OECD) Working Party on Indicators for the Information Society as “the sale or purchase of goods or services, conducted over computer networks by methods specifically designed for the purpose of receiving and placing of orders”. Colloquially, it is the trading or facilitation of trading in products or services using the internet. An e-commerce transaction can be between enterprises, households, individuals, Government and other public or private organisations.

India’s e-commerce market was worth about $3.9 billion in 2009, it went up to $12.6 billion in 20131. The digital economy is growing at 10% per year. With the incursion of the cost-effective data services, geopolitical boundaries have become irrelevant for businesses. Countries across continents have telescoped in one global village connected through the ubiquitous internet. E-commerce has made it possible to conduct many types of businesses at greater scale and longer distances than ever before. The Memorandum Explaining the Provisions of the Finance Bill, 2016 (the “Memorandum”) has also acknowledged the uniqueness of e-commerce in the following terms:

“Persons carrying business in digital domain could be located anywhere in the world. Entrepreneurs across the world have been quick to evolve their business to take advantage of these changes. It has also made it possible for the businesses to conduct themselves in ways that did not exist earlier, and given rise to new business models that rely more on digital and telecommunication network, do not require physical presence, and derives substantial value from data collected and transmitted from such networks.”

E-commerce – The game changer

The immateriality of the location of the seller or the service provider and the buyer of goods and services in a common-for-all and nebulous electronic platform has transformed the way in which businesses are conducted. Some of the features that have become prominent in e-commerce transactions and which are potentially relevant even from a tax perspective are as follows:

(a) Reach – Internet makes it easier for sellers to locate buyers in different countries and vice versa.

(b) Mobility – Users are increasingly able to carry on commercial activities remotely while travelling across borders.

(c) Identity – The fact that interactions on the internet remain anonymous may add to the difficulty of identity and location of users. Use of virtual personal networks or proxy servers can further disguise (intentionally or unintentionally) the location of ultimate sale.

(d) Lack of physical presence – A lack of physical presence in the country of source of income leads to further difficulties in transactions being reported and taxed.

(e) Lack of fully-developed regulations – Since e-commerce is a relatively new area of commerce, it is not fully regulated. For example, the Drugs and Cosmetic Rules, 1945, which regulates the sale and distribution of drugs in India but does not distinguish between conventional and over-the-internet sale of drugs.

Direct taxation issues in e-commerce

In Addressing Base Erosion and Profit Sharing (February 2013), the OECD has identified minimisation of taxation in the market country by avoiding a taxable presence as one of the strategies to be countered. The e-commerce economy cannot be restricted to borders of the seller alone and absence of physical presence in the market country often comes in the way of taxation of such transaction. Hence, it requires a co-ordinated international response for their effective taxation. Simultaneous with the Base Erosion and Profit Sharing Actions, several countries have also looked into this area of taxation and have attempted to secure their tax bases. In the Action Plan on Base Erosion and Profit Sharing, the OECD apprehended that inaction in providing clarity on taxation of e-commerce transactions could have disastrous effects. It has been stated as follows:

“Inaction in this area would likely result in some Governments losing corporate tax revenue, the emergence of competing sets of international standards, and the replacement of the current consensus-based framework by unilateral measures, which could lead to global tax chaos marked by the massive re-emergence of double taxation. In fact, if the Action Plan fails to develop effective solutions in a timely manner, some countries may be persuaded to take unilateral action for protecting their tax base, resulting in avoidable uncertainty and unrelieved double taxation. It is therefore critical that Governments achieve consensus on actions that would deal with the above weaknesses.”

For instance, in July 2015, a 10% tax on digital services came into effect in South Korea. Similarly, in October 2015, Japan started imposing 8% consumption tax on digital services.

It appears that the Government of India has taken cue from other countries and has sought to introduce provisions under the domestic law to tax such transactions. Even the Memorandum has, in the following terms, identified e-commerce as a distinct class of transactions requiring specific rules for taxation to meet new tax challenges:

“These new business models have created new tax challenges. The typical direct tax issues relating to e-commerce are the difficulties of characterizing the nature of payment and establishing a nexus or link between a taxable transaction, activity and a taxing jurisdiction, the difficulty of locating the transaction, activity and identifying the taxpayer for income tax purposes. The digital business fundamentally challenges physical presence-based permanent establishment rules. If permanent establishment (PE) principles are to remain effective in the new economy, the fundamental PE components developed for the old economy i.e. place of business, location, and permanency must be reconciled with the new digital reality.”

Proposed provisions and analysis

The Finance Bill, 2016 has sought to introduce a new Chapter VIII titled “Equalisation Levy” in the Income-tax Act, 1961 (the “Act”) as a levy for additional resource mobilisation purportedly to address the challenges of taxation of e-commerce transactions. The Chapter constitutes a code in itself providing for the charge of levy, its exceptions, consequences of default, appellate remedy, penalties etc. The purpose behind the introduction of this Chapter appears to be to bring within the tax net transactions whose source is in India and the benefit therefrom is received by the service recipient in India, though the service provider is situated outside India.

Important definitions – Clause 161(d) defines Equalisation Levy as the tax leviable on consideration received or receivable for any specified service under the provisions of Chapter VIII. Specified service means online advertisement, any provision for digital advertising space or any other facility or service for the purpose of online advertisement and includes any other service as may be notified by the Central Government in this behalf. Thus, currently, the levy is restricted to online/ digital advertisement and related services. However, in the future, additional services may be notified by the Government for the levy.

Charge of levy – As per clause 162, there shall be charged an equalisation levy at the rate of 6% of the amount of consideration for any specified service received or receivable by a non-resident from a resident for the purpose of his business/profession or from a non-resident having a permanent establishment (PE) in India (hereinafter such residents and non-residents are collectively referred to as the “Liable Persons”). However, Equalisation Levy will not be charged if the non-resident providing the specified service has a PE in India and the specified service is effectively connected with such PE. This is perhaps because in such a case, the profits and gains of the non-resident from such PE would already be taxable in India. An exemption from the levy is provided to small digital players where aggregate amount of consideration for the specified service received or receivable in a previous year by the non-resident from the Liable Persons does not exceed one lakh rupees. Furthermore, this Chapter VIII is not applicable to the State of Jammu and Kashmir as per clause 160(1). In other words, when the service recipient is situated in the State of Jammu and Kashmir, the provisions of this Chapter should not apply.

Collection and recovery – Clause 163, which deals with collection and recovery of the levy, places the onus on the Liable Persons to deduct the amount of levy from the amount paid or payable to a non-resident in respect of the specified service and pay the levy so collected during a calendar month to the Government by the 7th day of the immediately following month. It has also been provided that the liability to pay the Equalisation Levy shall trigger whether or not the Liable Person deducts the same from the payment of the non-resident. As per clause 167, simple interest @ 1% per month or part thereof shall be paid by the Liable Person for delay in making the payment of Equalisation Levy.

It is important to note that the liability to pay Equalisation Levy is not on the recipient-payee of income but on the payer. It cannot be regarded as tax on the recipient’s income as the recipient is in no way liable under this chapter. If the levy would have been introduced as tax on the income of the recipient non-resident, the same, in my view, would not have covered most non-residents belonging to countries with which India has entered into Double Taxation Avoidance Agreements (DTAA). This is because in the absence of a PE in India, the non-residents would not have been liable to tax in India in respect of income from online advertising as held by the Income-tax Appellate Tribunal (the “Tribunal”) in the following cases:

– Pinstorm Technologies (P.) Ltd. v. ITO [2013] 154 TTJ 173 (Mum.);

– Yahoo India (P.) Ltd. v. DCIT [2011] 140 TTJ 195 (Mum.);

– ITO v. Right Florists (P.) Ltd. [2013] 143 ITD 445 (Kol.).

Thus, the Government has, in a way, sought to overcome these Tribunal decisions by bringing online advertising services under the revenue net.

Furthermore, if the non-resident would have been made liable to pay the Equalisation Levy from the income earned by them, the same, in my view, could have been said to be inconsistent with the Non-Discrimination clause of India’s DTAAs with other countries. Therefore, the Government has sought to introduce this levy as an additional burden on the resident-payers. However, since the levy is to be deducted from the payment of the non-resident, it is possible that the consideration of specified services is increased by the non-resident to avoid taking any hit due to the levy.

There is no provision whereunder the non-residents can claim the amount of equalisation levy so deducted as refund or adjust the same against their tax liability in India. One aspect that is not clear is whether the liability to deduct equalisation levy would arise on date of invoice, on due date or on the date of actual payment. This, in my view could lead to some litigation in the future, unless clarified.

Furnishing of statement of specified services – As per clause 164, the Liable Person is liable to furnish a statement in respect of all specified services during a financial year within the time prescribed. If such statement is not furnished within that time, the Assessing Officer (AO) may serve a notice upon the Liable Person requiring him to furnish the statement within such time as may be prescribed, failing which and subject to any reasonable cause, the latter shall be liable to pay a penalty of one hundred rupees for each day during which the failure continues (clauses 169 and 170).

Also, if a person makes a false statement in any verification under this Chapter or any rule made thereunder, or delivers an account or statement, which is false, and which he either knows or believes to be false, or does not believe to be true, he shall be punishable with imprisonment for a term which may extend to three years and with fine. The impugned offence will be deemed to be non-cognizable. As per clause 174, prosecution cannot be instituted except with the previous sanction of the Chief Commissioner of Income-tax.

Processing of statement – As per clause 165, the statement of specified services so furnished shall be processed after adjusting for arithmetical errors, recomputing interest (if any) and redetermination of the amount of demand/refund. Thereafter, an intimation shall be prepared and sent to the Liable Person. However, such intimation shall not be sent after the expiry of one year from the end of the financial year in which the statement is furnished.

Rectification of mistake – As per Clause 166, the AO may amend any intimation, either suo motu or application by the Liable Person, within one year from the end of the financial year in which the intimation sought to be amended was issued with a view to rectifying any mistake apparent from the record.

Penalty for failure to deduct or pay Equalisation Levy – As per Clause 168, every Liable Person who fails to deduct the whole or any part of the Equalisation Levy as required shall be liable to pay a penalty equal to the amount of Equalisation Levy that he failed to deduct.

A Liable Person who, having deducted the Equalisation Levy, fails to pay such levy to the Government within the specified time shall, subject to a maximum of the amount of Equalisation Levy he failed to pay, be liable to pay a penalty of one thousand rupees for every day during which the failure continues.

Appeal against order imposing penalty – Within 30 days of receipt of order of the AO imposing penalty, the Liable Person is entitled to file an appeal with the Commissioner of Income-tax (Appeals) [the “CIT(A)”] as per clause 171. The appeal fees is
Rs. 1,000/- and the provisions of sections 249-251 of the Act, as far as may be, shall accordingly apply.

The aggrieved Liable Person or the AO, as the case may be, may file an appeal with the Tribunal within 60 days of receipt of the CIT(A)’s order and the provisions of section 253- 255 of the Act, as far as may be, shall accordingly apply.

As per clause 175, the provisions regarding appeals to the High Court are governed by section 260A while those to the Supreme Court are governed by section 261 and section 262. Omission of reference to section 260B of the Act in Clause 175, in my view, suggests that appeals to the High Court can be heard by one-judge Bench as well.

It is important to note that intimation issued under clause 165 or an order rejecting an application by the Liable Person to get a mistake apparent from the record rectified cannot be appealed against by such Liable Person. Also, the powers vested on the Commissioner of Income-tax under section 263 or under section 264 cannot be exercised in respect of Equalisation Levy.

Miscellaneous provisions – For carrying out the provisions of this chapter, the Central Government is empowered to make rules. Furthermore, within a period of two years from the date on which the provisions of this chapter come into force, the Central Government may, by order published in the Official Gazette, not inconsistent with the provisions of this Chapter, remove the difficulty if any difficulty arises in giving effect to the provisions of this chapter.

Amendments to other provisions – In section 10 of the Act, clause 50 has been proposed to be introduced which provides that any income arising from any specified service provided on or after the date on which the provisions of chapter VIII of the Finance Act, 2016 comes into force and chargeable to Equalisation Levy under that Chapter shall not be included in the total income of the non-resident.

Also section 40 of the Act is sought to be amended to provide that expenditure in respect of whose consideration, Equalisation Levy was deductible but such levy has not been deducted or after deduction, has not been paid on or before the due date specified in section 139(1) shall not be allowable as deduction. However, the deduction would be allowed in such year in which it is subsequently paid.

Allowability of Equalisation Levy in the hands of payer – The allowability of expenditure is governed by the provisions of section 37 of the Act. The liability to deduct and pay Equalisation Levy is nothing but a statutory duty which, in my view, should be eligible for deduction. This is because it can be said to be expended wholly and exclusively for the purpose of business or profession. The fact that the levy is attracted only if the specified services are procured for the purposes of carrying out business or profession further substantiates this view.

II. Tax deducted at source (TDS)

Proposed amendments

Rationalisation measures – As a rationalisation measure, the Finance Bill, 2016 has proposed amendments to the aggregate limits beyond which TDS provisions apply and also to the rates of deduction. A summary of the proposed rates and aggregate limits vis-à-vis the existing ones is as follows:

Nature of payment

Existing provisions

Revised (proposed) by Finance Bill, 2016

Threshold limit (Rs.)

Rate of deduction

Threshold limit (Rs.)

Rate of deduction

Payment of accumulate balance due to an employee (Section 192A)

30,000

10%

50,000

10%

Winnings from horse races (section 194BB)

5,000

Rates in force

10,000

Rates in force

Payment to contractors (section 194C)

75,000 (annual)

1% / 2%

1,00,000 (annual)

1% / 2%

Insurance commission (section 194D)

20,000

10%

15,000

5% 2

Payment in respect of Life Insurance Policy (section 194DA)

NA

2%

NA

1%

Payments in respect of National Savings Scheme deposits (section 194EE)

Payment of income in respect of units of investment fund (section 194LBB):

– Payee is resident

– Payee is non-resident

NA

NA

10%

10%

NA

NA

10% Rates in force

Insertion of new section 194LBC – A new section 194LBC is sought to be introduced to provide for deduction of tax at source on any income payable by a securitisation trust to an investor. As per proposed section 194LBC, the person responsible for making payment of any income to an investor in respect of an investment in a securitisation trust, such person shall at the time of credit of such income to the account of the payee or at the time of payment thereof in cash or by issue of a cheque or draft or by any other mode, whichever is earlier, deduct tax thereon, at the rate:

(i) Of 20%, if the payee is a resident individual or a resident Hindu Undivided Family;

(ii) Of 30%, if the payee is any other resident person;

(iii) In force, if the payee is a non-resident.

Reduction of compliance burden – In order to reduce compliance burden of assessees in whose cases the tax payable on recipient’s total income, including rental payments will be nil, it is proposed to extend the provisions of section 197A for making the recipients of payments referred to in section 194-I also eligible for filing self-declaration in Form no. 15G/15H for non-deduction of tax at source.

Omission of non-operational provisions – The following provisions are proposed to be omitted w.e.f. 1st June, 2016:

– Section 194K – Tax deduction at source on income payable to resident in respect of units of mutual fund;

– Section 194L – Tax deduction at source on sum payable to resident in the nature of compensation or consideration or enhanced compensation or consideration for compulsory acquisition of capital asset.

Amendment to provision requiring furnishing of Permanent Account Number (PAN)– The existing provision of section 206AA provides that any person who is entitled to receive any sum or income or amount on which tax is deductible under Chapter XVIIB of the Act shall furnish his PAN to the person responsible for deducting such tax, failing which tax shall be deducted at the rate mentioned in the relevant provisions of the Act or at the rate in force or at the rate of 20%, whichever is higher.

A controversy existed as to whether the penal rate of 20% or higher will be applicable in case of a non-resident whose income is chargeable to tax in India at a lower rate or is not taxable at all. Contrary views of the co-ordinate benches of the Tribunal existed on this issue.

While the Tribunal has, in the cases ofDDIT v. Serum Institute of India Limited [2015] 40 ITR (T) 684 (Pune) and DCIT (IT) v. Infosys BPO Ltd. [2015] 154 ITD 816 (Bang.),held that where tax has been deducted in respect of payments made to non-residents (who do not furnish their PAN) on the strength of provisions of DTAA and such rate is lower than 20%, provisions of section 206AA cannot be invoked to insist on tax deduction at rate of 20%, having regard to overriding nature of provisions of section 90(2), the Tribunal in the case of Bosch Limited v. ITO (IT) [2013] 141 ITD 38 (Bang.) held that the provisions of section 206AA clearly override the other provisions of the Act and failure to obtain and furnish PAN by a non-resident would attract provision of section 206AA. Currently, the provisions of section 206AA also apply to non-residents with an exception in respect of payment of interest on long-term bonds as referred to in section 194LC.

It appears that the Government has accepted the view of the Tribunal in the cases of Serum Institute of India Limited (supra) and Infosys BPO Ltd. (supra). In order to reduce compliance burden on non-resident assessees, it is proposed to amend section 206AA so as to provide that the provisions of this section shall also not apply to any other payment as well, subject to such conditions as may be prescribed.

This, in my view, is a welcome provision as it would substantially reduce the compliance burden of non-residents by doing away with the need for obtaining a PAN.